15 May 2016

More regulation, more gaming

The Economist, writing about new vehicle emission testing, is realistic rather than cynical: 

Changes to testing regimes are afoot. Japan is likely to review the way its tests are carried out. Europe’s system is also being readied for an overhaul. Plans are in place to replace its test cycle with a new one that more closely mimics real-world driving and imposes stricter rules over how cars may be prepared. A system for rechecking NOx emissions from production vehicles on the road is under discussion. That should ensure exhausts are cleaner. But the new test will only be harder, not impossible, to game. Exhaustive analysis, the 'Economist' 30, April
Incentives matter. The incentives faced by car manufacturers under any likely testing regime will, as the Economist says, encourage gaming. It's one chapter in an old and gloomy story: government sees a problem (air pollution in this instance), thinks it knows how best to solve it (by limiting certain vehicle emissions), and legislates its preferred solution. This can still work: where cause and effect are easily identifiable and when society's complexities are not overwhelming. But when it comes to air pollution it fails. It fails because vehicle manufacturers will game the system. And it's likely to fail for other reasons. The government doesn't and cannot know the type and impact on human health of the emissions vehicles produce when, necessarily, only some of the many emitted compounds can be identified and quantified. Regulating carbon dioxide, for instance has led to increases use of diesel engines, which generate different pollutants of unknown impact. Depending on how electricity is generated, even electric cars could have a more severe effect on health than petrol or diesel vehicles. Technology is changing fast, so is our knowledge of the relationships between emissions and health. Regulations cannot keep up with the pace of change. 

Here's another suggestion: use the Social Policy Bond principle to target air pollution. Issue bonds that become redeemable only when air pollution targets have been met and sustained. The bonds would then encourage exploration, experimentation and implementation of those ways of reducing air pollution that are most cost-effective. Being tradeable, they could target a long-term goal: investors could profit by making achievement of the goal more likely, then sell their bonds to new holders who would take the necessary next steps toward the goal's achievement. For links to papers on applying the Social Policy Bond principle to the environment see here.

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